On Cisco's layoff

We no longer compete in many sectors. High tech is the one that we should hold on. Hope Cisco is not the tip of an iceberg.

- Too many regulations to protect our workers.
- We're the victims of our own success as everyone demands higher salary.
- Our welfare is too generous. With all the entitlements, US is BANKRUPTed if it is a company and we would sell our assets.
- We will be left behind if we protect our environment and the lab 'mice'.
- All those 'left no one behind' our empty shout by ignorant leaders. We no longer have NASA and our astronauts have to learn Russian (Chinese in 10 years).
- Our debts will be paid back in generations and it will lessen our competitive edge.Just to0 many to list.

We have to redo our political system and balance the budget as outlined in my blog.
http://tinyurl.com/hua...

On today's financial news

Tony Pow , Contributor

Comments (8086) |Following

A lot of news on China.

* I own the Hong Kong Shanghai Bank - one of top global banks. It may move its headquarter again. British unemployment rate will rocket in coming years.

* Brazil depends on the oil price and China is the largest importer. The theory of better education and wealthier the country does not work for Brazil for a long while (Philippines is the opposite example).

* SZ-HK link does not mean a lot. It would reduce the price differences of companies listed in these two exchanges. SZ is the Silicon of the East and the factory for high-tech company for the world. If you have invented a high tech product, most likely you want to assemble there - most components such as batteries, cables...are available next street beside cheaper labor and the huge internal market.

Deng had his good insight to transform it from a fishing village about 30 or so years ago. You could have make a fortune if you invest every stock in the exchange despite many total losers. The housing is also skyrocketed literally.

* Macau's casinos should be better after the opening of the bridges connecting mainland China and Hong Kong - it is one of the most important global projects. The Chinese government demonstrates regulations could kill a sector - most whalers are not showing up in the sea in Macau.

* AH teaches us many lessons in investing. Will update my book on this.

Mergers

Mergers are usually good for the merging companies to eliminate duplicate corporate functions such as payroll administration and researching on similar subjects.

The company being acquired usually has huge appreciation. I have a screen to search for the potential candidates. The Early Recovery (a phase of the market cycle defined by me) has more of these candidates. Big companies know their values and see good values when these stocks have been beaten in the market.

Then I do an intangible analysis on items that are not available in the financial statements and/or cannot be quantified. They are patents, technologies, research staffs, customer base, brand name, barriers to entry, distribution channels, competition, product cycle, management, pension obligations…

In 2003 I bought stock of a software company that was acquired by IBM profiting more than double. In the 2008 cycle, I bought ALU at $1 and sold it briefly at 40% profit. I expected Cisco would acquire it but it did not. In two years it was acquired by another competitor for more than $3. I need patience. ALU had a lot of patents.

The company going to be acquired tries to make the financial statements very rosy. A Chinese company tricked Caterpillar to acquire it and Caterpillar lost huge in this deal. Even big company can be fooled. It happens every day for buying small businesses. One simple trick is asking their friends buying the services on the first few months after the business has been sold. 

However, the record mergers in 2015 may not be good for the companies involved judging from history. When two losing companies merge, there will be two losers in most cases.

Watch out for rocket stocks

Three steps you can do on rocket stocks:

1. Are they justified for the high prices? Some are.

2. Use trailing stops.

3. When the market plunges or the institution investors change direction, they are the first to be hit and lose far more than value stocks. Pay attention to both.

Explained in my book: Complete the Art of Investing.
http://www.amazon.com/dp/B01AASN2GA

On today's financial news

* Retail is a tough business. If you count the top 10 retail chains 10 years ago, you do not find many survived. Macy's was almost bankrupted if not rescued by a rich Hong Kong business man. Will see more Chinese are coming in retails to the US. Amazon is losing some luster with shipping charges and state sales taxes.

* The robots in Wall Street do not ask for any bonuses or vacations.

* Vote the lesser of two devils. Some suggested to vote besides the two. It will not work:  that one will not be elected and you lose the choice of voting the lesser of the two devils.

* The money counters in most major corporations do not care about the computer systems. You get what you paid for. They should have a backup system in another city. Today every thing is connected; it is a hazard and also an opportunity.

Olympics and China

I'm going to open a cupping salon or a franchise if it works. I remember all the Chinese restaurants made great money after Nixon returned from China. They're the best promoters. The technicians will be licensed (by me), beautiful (using my own yardstick), money back if it does not work (I'll suck them in the opposite direction). Look for my franchise near you named Cup the Pain. Ladies will be free with 2 cups for the first time.

Prediction: US will be #1 in gold and in total medals followed by China.

I cheer for the countries to win their first medal. It could lift the spirit of a nation. It is more practical than Mao telling his starving citizens that they're #1.

Fu, the silver medalist, had the best summary: "Try the best and enjoy the game." It is from her heart, not sth the coach told her to say "Thanks for the couch and country." What a change to individualism and self expression in China.

How to avoid bankrupting companies

Avoid the bankrupting companies at all costs. Here are some hints:

·        I have several companies that have lost most of the stock values. It turns out most are Chinese companies; I do have some losers from Mexico, Israel and Ireland. Most were set up to cheat investors with ‘rosy’ financial statements. Avoid them especially small companies in emerging countries.

·        Many US companies failed due to frauds and wrong bets. When the CEO is using the company as his own AMT or having an extravagant life style, watch out. If they promise you a return doubling the current rate, listen to your wise mother: there is no free lunch. Despite of so many real examples, still fools are born every day because of their greed.

·         Do not follow the ‘commentators’ from TV; they have their own hidden agenda that usually are not in your interest.

·         Many companies fail due to unable to pay back their loans. Except for specific industries and situations, avoid companies with high debt (over 50% debt/equity to me). Financial institutions and companies that have high debts in order to finance their products for their customers such as some auto companies could be the exceptions.

·         I have a screen named Big Losers beating the market by more than 600% in Early Recovery (a phase defined by me). However, some bankrupted companies are not included in the database which is termed as survivor bias. I still use this screen but skip these companies using the following yardsticks.

·         The companies are usually safe with high Free Cash Flow / Equity and high Expected Profit / Stock Price.

·         The following are red flags: low Free Cash Flow / Equity, high Inventory and high Receivable (esp. relative to its Payable).

·         New government regulations could bankrupt an industry. What would happen when the U.S. takes out the rebates and subsidies of solar panels? When the U.S. banned solar panels from China, one of my Chinese stocks bankrupted.

·         Serious lawsuits. Most U.S. companies are required to file this information in the financial reports.

·         Obsolete products. Newspaper and similar products would be replaced by the internet. The opposite is new products such as virtual reality in 2016.  

·         If you expect the market will recover in 2 years, ensure the company’s cash and loans can support their burn rate for at least two more years.

·         Many investing sites (most required subscription) have safety scores.

·         If the Beneish M-Score is greater than -2.22, the company is likely an accounting manipulator.

·         Choose companies with Z-Score higher than 3. Both M-Score and Z-Score are available from GuruFocus, a paid subscription. Z-Score does not work for financial institutions.

·         Z-Score metrics are: “Working Capital / Total Assets” (A), “Retained Earnings / Total Assets” (B), “Earnings Before Interest & Taxes / Total Assets” (C), “Market Cap / Total Liabilities” (D) and “Sales / Total Assets” (E).

Z-Score = 1.2 A + 1.4 B + 3.3 C +.6 D + E

-     Small companies could be risky but very profitable. Typically they have low stock price (less than $5), small market cap (less than 50 M), low sales (less than $25 M) and low institution ownership (less than 5%).        

- Play market timing. It does not always work, but it is far better to follow a proven technique than not. It is far safer to take money off when the market is risky.

·         Invest and not trade for most of us.

Investing is risky to start with. However, investing especially in stocks has been proven the best vehicle to beat inflation. 

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This is one chapter of my book "Complete the Art of Investing". If it helps you, envision how 835 pages (Kindle version) would help you. It could be the best $10 you ever spend.

The above is an abstract from my book "Complete the Art of Investing" which is available from Amazon.


I challenged to have the best-performed article in Seeking Alpha history, an investing site, for recommending 5 or more stocks in one year after the publish date. The concepts for that article are discussed in this book.

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